Bank of England torn between inflation fears and Covid recovery

LONDON: The Bank of England is forecast to keep record low interest rates on Thursday -- the latest major central bank to weigh fears of spiking inflation against the need to nurture economic recovery from Covid.

The British central bank will announce the outcome of its meeting at 1100 GMT, when it is predicted to keep rates at 0.1 percent and maintain bond-buying stimulus.

The US Federal Reserve and European Central Bank kept their own ultra-low rates and economic support measures intact in recent weeks, insisting that high inflation is a temporary side-effect from the global rebound.

The Bank of England's rate-setting monetary policy committee (MPC), chaired by Governor Andrew Bailey, will be eager not to snub out any nascent economic recovery in the second quarter by raising rates too soon.

The BoE's chief task is to use monetary policy as a tool to keep the inflation rate close to a 2.0-percent target, in order to preserve the value of money.

Inflation last month hit 2.1 percent -- the highest level since before the pandemic -- with clothing, fuel and oil prices rebounding as the economy reopens.

Policymakers will also be mindful of retreating unemployment, as the economy gradually emerges from lockdown.

"Inflation is rising and unemployment is falling, but the Bank of England isn't going to do anything about raising interest rates until it's sure these aren't just transitory factors emanating from an economy that's gone from red to green," said analyst Laith Khalaf at stockbroker AJ Bell.

The labour market is being helped also by the government's temporary furlough scheme, which pays the bulk of wages for millions of private-sector workers but will be phased out by September.

The Covid-ravaged economy grew by an encouraging 2.3 percent in April as the government began to ease lockdown.

Bright survey data has sparked hope of a rebound in the second quarter or three months to June, after shrinking 1.5 percent in the first quarter.

Private sector business activity expanded at a near-record pace in June, with businesses taking on staff at a record rate, data firm IHS Markit said.

The BoE expects the economy to grow 7.25 percent this year.

But markets are increasingly anxious over a global inflationary surge, fuelled by consumers' pent-up demand.

BoE chief economist Andy Haldane, who will attend his swansong MPC on Thursday, has warned of a "dangerous moment" for central bankers and the broader economy.

"The inflation tiger is never dead. While nothing is assured, acting early as inflation risks grow is the best way of heading off future threat. This is monetary policy 101," Haldane wrote in New Statesman magazine.

Bailey has however repeatedly stated his belief that current inflationary pressures are only "transitory".

Inflation in Britain has nevertheless accelerated sharply since March, when the government began a phased lifting of coronavirus restrictions.